Natural Gas Volatility Continues As Russia And EU Battle Over Energy

(Wednesday Market Open) Investors appear to be bullish despite earnings misses from tech giants and a looming interest rate decision from the Federal Reserve this afternoon.

Potential Market Movers

After yesterday’s close, Microsoft MSFT reported that it missed big on earnings and revenue, causing the stock to fall 2.61% in after-hours trading. The company cited currency headwinds for its misses, but its cloud business was also on the low end of estimates. MSFT said it was still experiencing higher demand from businesses, which could be the bright spot investors were focusing on as shares rose 3.4% ahead of the opening bell.

Alphabet (NASDAQ: GOOGL) also missed on its top and bottom lines, but not as badly as Microsoft. It reported higher ad revenues than many expected after Twitter’s (NYSE: TWTR) big miss last week. Alphabet dropped immediately in after-hours trading but bounced back and to rally 2%, and was up 3.86% premarket.

With Microsoft and Alphabet bouncing back, the tech-heavy Nasdaq futures were trading 1.39% higher before the opening bell.  

It’s another busy morning for earnings reports:

• Texas Instruments TXN beat on top- and bottom-line numbers but guided earnings and revenue a little bit higher prompting the stock to pop up 3.27% in the extended session.  
• Visa V also beat on earnings and revenue estimates as payment volume increased 13% year-over-year (YOY) and transactions processed rose 16% YOY. Visa rose 2.3% in after-hours trading but turned negative this morning.
• Rio Tinto RIO reported that its profits fell 29% because of a lack of demand from China. The metals and mining company also lowered its earnings outlook and cut its dividend in half, causing the stock to fall 3.55% in premarket action.
• Boeing BA continues to struggle as it missed on top- and bottom-line estimates due to lower volumes from its defense business. However, BA projected positive cash flow later in the year causing the stock to rally 3.15% ahead of the opening bell as it appears to be turning around sooner than expected.
• Shopify SHOP fell 2.38% premarket after missing on earnings and revenue estimates due to shrinking margins. Yesterday, SHOP dove 14.1% after announcing it planned to reduce its workforce by 10% by the end of the day on Tuesday.
• Hilton HLT also reported better-than-expected earnings and revenue which caused the stock to rally as high as 7.5% ahead of the opening bell. HLT also raised their profit forecast due to strong travel demand.

After today’s close, the tech earnings showcase continues with Meta Platforms META and Qualcomm QCOM reporting their numbers.

A positive economic report came out before the open as durable goods orders were better than expected. These numbers could help prop up GDP numbers later this week. Orders were forecast at -0.5% and came in at 1.9%.

The retail inventories report confirmed what Walmart WMT warned yesterday—retailers have a lot of product to be cleared out. This could hurt retailers as they’ll likely have to offer deep discounts to clear out the inventories for the back-to-school and holiday shopping seasons.

After the opening bell, the pending home sales report will come out. And, of course, the FOMC announcement this afternoon will draw all eyes. Look for my response this afternoon.

Reviewing the Market Minutes

Walmart WMT surprised investors by slashing its Q2 and full-year earnings guidance Monday night due to rising inflation and high inventories. The stock dropped 7.6% yesterday dragging fellow retailers Target TGT and Costco COST down 3.6% and 3.25% respectively.

The majority of Walmart’s issues came in clothing as consumers are seeing more of their budgets taken up by food and fuel inflation. In fact, WMT remained relatively strong in their groceries segment. The market reaction reflected Walmart’s storyline as the Dow Jones U.S. Retail Index tumbled 4.04% and the Dow Jones U.S. Food Retailers & Wholesalers Index slid 2.61%.

Walmart was also a drag on the Dow Jones Industrial Average ($DJI), but the index actually fared better than its peers. The Dow fell 0.71%, while the Nasdaq ($COMP) plunged 1.87% and the S&P 500® index (SPX) tumbled 1.15%.

In other stock news, McDonald’s MCD rallied 2.7% on better-than-expected earnings and a positive outlook.

Finally, the U.S. Dollar Index ($DXY) rallied 0.69% on the news that EU countries will cut their natural gas use. The rising dollar pushed mega-cap stocks lower. 

Three Things to Watch

UNNATURAL: After a very volatile day of trading, natural gas futures settled 1.4% higher on the day. However, the U.S. price for natural gas pales in comparison to Europe where natural gas closed 19.77% higher. According to CNBC, Europeans are now paying nine times what Americans are for natural gas.

Europe’s natural gas prices rose after EU nations recently agreed to voluntarily cut gas consumption by 15% starting next month. The EU is attempting to strike back at Russia for greatly reducing its gas supplies flowing into Germany through its Nord Stream 1 pipeline. Russia claimed the reduction was due to turbine problems, but EU officials say that Russia is using energy as a weapon.

SPREADING THIN: The 2-year Treasury yield rose to 3.057% while the 10-year Treasury yield (TNX) fell to 2.787%. The spread between the yields caused the 2s10s spread ratio to invert even more. In fact, it’s the deepest inversion since 2006, which was a little more than a year ahead of the Great Recession.  

The difference in the yields could reflect the uncertainty investors feel about the markets. The desire to buy lower-yielding and higher-maturing bonds is very odd unless you feel that the economy is going into recession and stocks are likely to fall. If that is your projection, then locking in the safety of Treasuries for a longer period could make sense.

Additionally, if you believe that Fed is going to have to cut rates by July of next year because of a recession—which the CME FedWatch Tool is currently forecasting—then the price of your 10-year Treasuries should rise and you could more than make up for what you lost in yield.  

BOOBY TRAP: The worst-case scenario for Treasury buyers—not counting the U.S. government defaulting—would likely be stagflation. This occurs when the inflation persists even though economic growth is negative or low and unemployment is high. High inflation won’t allow the Fed to lower rates to stimulate the economy, so Treasury investors probably wouldn’t get any price appreciation and would have to settle for collecting the bond payments. They would miss out on the opportunity to get a higher yield with the shorter duration.

Notable Calendar Items

July 28: Gross domestic product (GDP) and earnings from Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Mastercard MA, Intel INTC, and Caterpillar CAT

July 29: PCE Price Index and earnings from Exxon Mobil XOM, Procter & Gamble PG, and Chevron CVX

Aug 1: ISM Manufacturing PMI and earnings from Activision Blizzard ATVI, Simon Property SPG, Devon Energy DVN, and Aflac AFL

Aug 2: JOLTS job openings and earnings Archer Daniels Midland ADM, Caterpillar CAT, PayPal PYPL, Starbucks SBUX, and Occidental Petroleum OXY

Aug 3: ISM Non-Manufacturing PMI and earnings from CVS Health CVS, Booking BKNG, Moderna MRNA, MetLife MET, and Yum! Brands YUM

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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